Unemployment and Inflation - Where does it go from here?

The labor market is tight and unemployment numbers are at almost a 20-year low. This means that competition for labor resources is tight, and some are considering the current 4.1% unemployment number equivalent to “full employment.” With unemployment numbers this low, employers will eventually need to consider pay raises or other compensation to lure and/or retain employees. At some point, this will put pressure on companies to raise prices for their products, and when that occurs you will have inflation.

Neel Kashkari, President of the Minneapolis Federal Reserve, said as much on Tuesday, January 9th. He is advocating lower levels of unemployment to drive up wages, which will result in higher inflation. He may get more than he bargained for – playing with inflation is like playing with fire, in that if you aren’t careful you could get burned. And at the rate the unemployment numbers are going down, the Fed might get scorched.

Danielle DiMartino, author of Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America, has a very interesting article on her website that talks about how wrong the Fed is on inflation. She states that prices for commodities and “necessities” are only going up, which will eventually restrict consumer household spending. She also points out the recent actions by China and the Bank of Japan that indicate their intent to reduce Treasury holdings. These actions imply they also have concerns about the American economy.

Everyone who ignores these signposts and warnings, does so at their own peril.

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